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Value Is Alive and Well

Those predicting the death of buy-and-hold value investing are dead wrong.

Value investing is dead, and someone forgot to tell Philip Durell to turn off the lights of his Motley Fool Inside Value newsletter service.

Nobody uses a buy-and-hold strategy these days. It's anathema in today's world of category-killing disruptive innovation. The key to success today is buying when a stock is hot and selling as soon as it's cooled off. That's the nature of today's game. Everybody's doing it. The statistics don't lie. So that must be the way to beat the market.

And why is Warren Buffett followed like a demigod? Who cares about Berkshire Hathaway's 40 years of 22% annual growth? What has he done for me lately? If he and his overly opinionated curmudgeon of a sidekick Charlie Munger can't find any place to invest more than $40 billion, clearly they have lost their touch. Investing gurus, my ...

As I said, value investing is dead.

Right?

Not so fast. There's a new investing luminary in town. And Eddie Lampert's proving that once again, the tenets of value investing are alive and well. So take note, Fools, because what follows is the time-tested system to creating tremendous wealth in the stock market.

Investing is most successful when it is most businesslikeWhy is Eddie Lampert on top of the business world? Because he is first and foremost a businessman.

By now, everyone probably knows that he combined a dead retailer and a dying brand to create one of the best investments of the past three years. But let's get something straight: The creation of Sears Holdings(NASDAQ:SHLD) was all business. It was about hiring the right people and giving them the right incentives. It was about improving the blocking and tackling (a.k.a. operations) and allocating capital Foolishly. And let's not forget the key to retailing -- giving the customers the products they want.

Buy when others are fearfulIf bankruptcy doesn't drive prices down with fear, I don't know what does. As I've said before, Lampert swooped in and bought Kmart's stores and, more importantly, its distribution assets for pennies on the dollar.

But just because you buy something for pennies on the dollar, that doesn't mean it will automatically turn into a good investment. Some things sell for bargain prices because they have very little value. But in the hands of the right operator, retailing can be a wonderful business.

Place big betsThrough his investment management firm (or "hedge fund," if you like), ESL Investments, Lampert owns 39% of Sears, which makes up 73% of the capital invested in the portfolio. In addition, Lampert has huge ownership positions in two other retailers, AutoNation(NYSE:AN) and AutoZone(NYSE:AZO). According to FactSet Research, Lampert owns 29.5% of AutoNation (a $1.6 billion stake) and 27.6% of AutoZone (a $2.1 billion slice).

There is no better way to generate great wealth than to take concentrated positions based on the courage of your value convictions. Scarecrows need not apply. And, though I'll certainly receive some nasty emails for writing this, it's knowledge, not high levels of diversification, that is the great emancipator from risk. I'll be the first to admit that there are plenty of businesses I don't understand -- and will most likely never understand. So why should I invest in them based on some asset-allocation strategy? Sounds like a surefire way to lower returns -- not lower risk -- to me.

Circle of competenceIs retailing Lampert's circle of competence? Heck no, you could argue. Lampert is a stiff-shirted Goldman Sachs financier type from Greenwich, Conn. -- not a get-your-hands-dirty Sam Walton type from the backwoods of Arkansas.

He may not have been born to be a retailer, but he sure invests in lots of them. Check that -- he successfully invests in them.

But this shouldn't come as any great surprise. Retailing is relatively easy to understand. The industry has substantial competitive advantages that you can exploit on a large scale if you can make customers happy with their purchases, especially here in the hyper-consumptive United States. Retailing may not be as sexy as search technology or nanotechnology, but successful investors can find huge gains over time.

Act like an ownerOr, in Lampert's case, become the owner. Regardless of the size of your position in a company, you should always think like an owner. Do you agree with the current promotion? Could this store be remodeled? Should that store be closed down? Do the new commercials portray the company correctly?

It's your capital. Always make sure it's being used to your advantage.

Margin of safetyI have always thought that Target(NYSE:TGT) was the model Lampert was looking to emulate. So I was surprised to read that he never even analyzed the real estate, and that the whole idea was to run the retail operations. There's no reason not to believe him, but he had to know that selling off the real estate and getting out of the operating leases would create a safety net for his capital.

In fact, that ace-in-the-hole exit strategy was quite valuable. In fact, famed short-seller James Chanos talked about how he exited his short position in Kmart as soon as Lampert started attracting great prices when selling off real estate and leases.

The Foolish bottom lineSo how has Lampert fared thus far? According to my own calculations, here are his investment results:

Start Date

Start Price

Current Price

Total Return

Annual Return

Sears Holdings

May 2, 2003

$15.00

$139

926.7%

159.7%

AutoNation

Jan. 2, 2000

$8.29

$21

253.3%

21.6%

AutoZone

Jan. 2, 2000

$32.31

$98

303.3%

26.3%

Note: The AutoZone statistics are tracked since Lampert joined the board of directors in 2000. I've read that Lampert started buying shares of AutoZone as early as 1988 and started amassing shares in 1998. ESL Investments has owned shares of AutoNation since January 2000.

What this shows is that the principles of value investing are alive and well. There's no need to chase story stocks or flip your portfolio or think for the short term. Just good ol' fashioned business sense.

Do you want to generate wealth in the stock market? Remember the principles that great investors like Eddie Lampert use. Philip Durell does, and his Inside Value recommendations are beating the market by more than 6 percentage points as a result. If you'd like to join a community of value investors, take a 30-day free trial to our service and join the ranks of investing greatness.

David Meierdoes not own shares in any of the companies mentioned. AutoZone is an Inside Value recommendation. The Fool has adisclosure policy.